Comment by terminalshort
4 months ago
> In the 20th century, U.S. companies put their excess profits into corporate research labs. Basic research in the U.S. was done in at Dupont, Bell Labs, IBM, AT&T, Xerox, Kodak, GE, et al. This changed in 1982, when the Securities and Exchange Commission ruled that it was legal for companies to buy their own stock (reducing the number of shares available to the public and inflating their stock price.) Very quickly Basic Science in corporate research all but disappeared. Companies focused on Applied Research to maximize shareholder value. In its place, Theory and Basic research is now done in research universities.
I'm not seeing how you get from share buybacks to a shift in priorities in corporate research. If there's a fundamental reason why it can't be done now how it was before the 80's it's not that.
Not why it can’t be done so much as why it isn’t done. Share buybacks allow companies to reward executives directly as their compensation is tied to stock price. If we started not doing that, the priorities might shift, but those executives like things the way they are.
Before Tim Cook Apple had never done a buyback - Jobs was always thinking Apple could do better with the money in R&D than paying off shareholders. Wall Street did not approve of this position, but Jobs wasn’t one to listen to anybody, so it did not matter. Most CEOs are not going to take such a strong position when they, the stockholders, and every other executive can be guaranteed a financial reward through a buyback.
> Share buybacks allow companies to reward executives directly as their compensation is tied to stock price. If we started not doing that, the priorities might shift, but those executives like things the way they are.
This isn't right but it's adjacent.
Executives don't need buybacks to get whatever compensation. Their compensation is negotiated and you can write the contract to make it whatever.
However, paying dividends is a taxable event, which means shareholders don't like it. You have to pay the tax on the dividend immediately instead of when you sell the shares, even if you just use the money to buy more shares. Buybacks don't work like that unless you're the one who sells your shares in the buyback. Which you can be if you'd rather have the money immediately (and pay the tax) than de facto increase your holdings in the company.
If transferring money to shareholders as dividends forces them to realize taxable gains before they want to then they'd prefer the company keep the money and invest it in something internally instead. Buybacks give them away around that.
But that's not necessarily bad. The shareholders (the ones who sold their shares) get the money instead and then invest it in something else, ideally a different company so that the existing large company doesn't get even bigger.
Also, when the company keeps the money, it doesn't have to use it for R&D at all. Companies often use it to acquire other companies, which is the worst.
You don't really want a tax incentive to make big companies bigger.
> Companies often use it to acquire other companies, which is the worst.
We also used to enforce antitrust law.
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> However, paying dividends is a taxable event, which means shareholders don't like it.
Shareholders love dividends because it is taxed as capital gains ( long-term capital gains if you own the stock longer than 1 year ). It's why most of the publicly listed stock ( of profitable companies ) pay dividends - because shareholders want dividends. Apple was forced to pay dividends by investors. So was Meta. As was Alphabet. All under shareholder pressure because dividends get tax as capital gains. Any company sitting on a pile of cash will get pressure to pay it out as dividends by shareholders.
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I like having a dividend. A company like NVDA forces shareholder returns to the whim of the market price, but dividends stabilize things because the stock is actually tangibly worth something. It also forces a certain discipline in the company, since shareholders don't like dividends getting cut. It also limits empire-building, di-worsification, and "good ideas" that have questionable ROI.
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> Share buybacks allow companies to reward executives directly as their compensation is tied to stock price.
To be fair share owners also like the stock price to go higher, they also like dividends (and higher dividends would tend to drive the stock price higher too), but an X% increase in share price caused by buybacks is favoured over an X% dividend because it isn’t immediately taxed.
My understanding is that executives prefer buybacks because they mostly are compensated with stock options, which don't pay dividends (until exercised) but which appreciate disproportionately from buybacks.
Dividends actually directly lower the stock price. Keep an eye on your portfolio when your holdings go ex-div -- the price falls because it no longer includes that cashflow.
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Also, I believe in the US ordinary dividends are taxed at the income tax rate which is much higher than the capital gains rate.
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with everything at record highs we'll see if we continue to prefer inflated share price over reinvestment in the business or increased dividends.
Maybe some of these 2-brain cell executives should consider that their "buybacks" will be worthless when US throughput starts to be equally worthless compared to the rest of the world...
Of course, I'm being a bit pejorative, they aren't thinking big picture at all, just concerned with what happens tomorrow not the day after...
However, they are in part responsible for the nonsense happening at the moment wrt to American policy, it seems like a game who can light cash on fire the fastest ..
It's a prisoner's dilemma, but with a large number of prisoners.
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Oh they know. They just don't care.
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It's a perfect example of a prisoner's dilemma.
> Jobs was always thinking Apple could do better with the money in R&D
Turns out Jobs was right, relevant article from 2006:
https://appleinsider.com/articles/06/01/16/apples_jobs_says_...
Scale matters.
From TFA:
> pushed the company's market capitalization to $72.13 billion
This, on annual revenue of ~$19B.
Apple today is closing in on 2x that revenue every month now. Quarterly net profit exceeds annual revenue in 2006. The Apple Watch group is roughly half the size of the whole company in 2006.
At some point, it became clear that the business throws off vastly more cash than can be productively used in R&D (here I will note that Apple's recent profit gusher is already net of investments in things like the Titan car project, Vision, and all the other stuff they work on but never release).
Share buybacks are are at least nominally a financially neutral exercise - it generally does not benefit either shareholders or executives.
They can however signal 'strength' in stock price by creating more demand and signalling to the market that the company itself which has 'insider information' believes the stock price is worth less than the price they're bought for.
It's a fair point about Jobs - but - Jobs was never sitting on more money than the economies of most nations.
Jobs Apple was a consumer product company, Tim Cook Apple is a Private Equity Operating Entity in a way. Their financial operations dictate as much about their valuation as anything else.
> Jobs was always thinking Apple could do better with the money in R&D
> Jobs wasn’t one to listen to anybody, so it did not matter.
It did matter. Jobs was wrong. Apple indeed couldn't do better. It's not even that Apple couldn't produce R&D results worth all this money. Apple couldn't even manage to spend at that pace. Steve Jobs' projects could and did use a lot of money but nowhere near that pace. And the pace of earnings got better still after Jobs.
Jobs was right on another aspect which was that this pile of money provided Apple solid, safe ground. Apple was safe from any risk of a few years of bad earnings. That was very costly safety.
It took a different CEO to finally work to reverse the damage. That project has taken many years and (arguably) isn't finished yet. And that's in parallel to massive increases in R&D.
It doesn't do a lot of basic science - I expect. But it does or funds a lot of engineering and applied science. that's the point of the article, that in the up-to-recently US system, corporations even with lots of earnings didn't have to.
But dividends also result in a concrete financial reward for all shareholders, yes?
> all shareholders
That's the key phrase, they benefit all shareholders. Buybacks on the other hand only benefit the following shareholders:
1. those with regularly vesting stock options and stock grants - basically employees. For non-tech companies especially, this only means high-ranking employees
2. those who intend to sell - that is, soon-to-be-ex shareholders
3. those who borrow against their stock - typically high-net-worth individuals who own a lot of the stock
Stock buybacks are thus a non-egalitarian way to return profits. To reward all shareholders equally, pay dividends.
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> But dividends also result in a concrete financial reward for all shareholders, yes?
Yes, but less because in many countries dividends are taxed more than selling shares after a share price increase.
dividends and capital gains are taxed differently
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The reality seems to be that only the genius founder is allowed to do any unorthodox moves as the CEO. Once he's out, the board selects a CEO that will basically continue business as usual without rocking the boat. The new CEO essentially won't have a mandate to use any controversial or original approach.
Dumb maybe question: Why couldn’t the companies with excess profits just pay they employees more in salaries?
Companies are controlled by shareholders who appoint the board who appoint the CEO. If the CEO decides to pay employees more, the board will change him because shareholder put money to get money out, not to give to employees.
Companies can give "shares" to employees, which means excess profits can be made dividends out of which employees "touch a bit".
If you would have your own company (privately own and full control) you are of course free to share the excess profit as you see fit.
Edit: and of course, share buy back avoids some taxes that you must pay, which in other schemes would have to be paid.
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> Why couldn’t the companies with excess profits just pay they employees more in salaries?
They could, but why should they? Which advantage get the shareholders from this?
The only reason why a company with excess profits "should" pay the employees more is if
i) for a given role, the expected results of potential applicants varies a lot (i.e. the company has an incentive "to hire the best of the best")
ii) the market for these exceptional talents is tough (i.e. if the company does not hire the best, someone else will; additionally, if the company does not pay the employees really well, they will be poached)
Different markets. Companies are created to allow investors to create profits selling something (things, services, etc). Companies compete with other companies to attract capital. Companies which offer higher expected returns for comparable levels of risk will attract more capital. This reflects supply and demand for capital.
Employees are part of a labor market. Supply and demand in the labor market drives compensation levels. When you have a rare skill that is perceived to be valuable, you can get higher compensation - e.g. Meta AI researchers getting $100M contracts or Juan Soto getting a $750M baseball contract.
As mentioned elsewhere, some companies give stock to employees. In my experience this is for one of two reasons. 1) Employee retention - stock grants tend to have multiyear vesting periods designed to keep the employee at the company. 2) Start up companies that do not have the cash to pay employees.
None of these explanations would lead to simply paying employees more with excess cash (unless the cash was created by a group of employees that you were trying to retain).
You're thinking of companies as teams where employees are members, but c-staff just see their employees as expensive suppliers.
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1. They don't have to 2. If employees want to be exposed to excess profit (and loss) they can buy shares like everyone else. (Not a super strong argument tbh) 3. It's impossible to measure how much any given employee/department really contributed and they don't want to create a culture of chasing fat bonus checks. 4. To some extent they do tend to. Profit sharing plans and ESOPs aren't that uncommon
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> couldn’t the companies with excess profits just pay they employees more
Would that improve productivity (for that company)? Do most people refuse to work for Apple because it doesn't pay enough? Is apple limited by lack of productivity? Is Apple limited by lack of R&D budget? Would Apple release on the world more, better stuff if it paid 10% more?
Then too, most US Apple employees own a lot of Apple shares - they do get paid more when Apple pays dividends, buys back, increases the share price (/ shrinks the number of shares - same thing). Even recent Apple employees who did buy/ get the shares they could really did very well! They are shareholders.
As it is, Apple has a large number of employees in the most expensive areas of the world. It's not exactly that it's desperately skimping on employee compensation.
My impression is that Apple, still now, has a hard time finding worthwhile things to do with its profit. It generates a lot of cash, uses everything it can manage, and releases the rest productively.
The same reason you don't give a store $2 for something priced at $1 or write anything other than a zero in the box on your tax form that lets you pay more if you like.
That would not make the share price number go up, which in turn means it doesn't make the leadership's net worth number go up, which means the leadership won't make that choice.
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Why would they do that when they could pay shareholders and themselves?
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The only people who matter are shareholders. Employees are a means to the end of making money for the owners of the company whether through stocks or other kinds of ownership.
That would set a precedent they don’t want. Investors and the Federal government have little interest in labor gaining power.
For businesses, employees are a necessary evil and not company's beneficiaries.
they don't want to
the purpose of a company is to deliver maximum return to shareholders; if they're not doing that, then they're failing their fiduciary duty and the shareholders might try to force the company to change its ways
the shareholders want the money coming to them, not to the employees
(this is why the Public Benefit Corporation, "B-Corp" structure was invented, so that the company's stated purpose can be something other than simply generating value for its shareholders)
They could, but then they'd have to report lower profits by the same amount. I want to actually defend this though: Corporate profit is a very narrow measure, by design. It was never intended to capture how well the nation is doing.
Isn't corportate csuite compensation the highest it's ever been? This isn't that great of an argument.
The train of thought here is that product people innovate and launch companies, but operations & finance people have no idea how to innovate or create new products.
Putting in a finance/ops person as the CEO will stagnate a company from a product standpoint.
And yet when Jobs returned to Apple he blew up ATG (the Advanced Technology Group) that gave us Quicktime, etc. He also shutdown Apple's research library (and gave all the books to Stanford, I believe).
He seemed to have little patience for "scientists" — preferred engineers that shipped shit.
I think that at best he saw research as expensive, at worst he saw it as elitist.
Wasn't Apple burning money when he joined?
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"real artists ship" - Jobs
And yet, he went to Xerox PARC and copied their research.
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If companies want to reward executives directly they can cut out shareholders entirely and pay salaries and bonuses. If companies want to reward shareholders (including executives) they can pay dividends (which Apple did do under Jobs). Nothing about the priorities of companies changed with share buybacks.
As others have mentioned that isn't comparable because salaries are taxed. The tax rate on unrealized gains in the US is zero percent from what I understand.
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For one thing, buybacks aren't charged against profits. Compensation is.
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The whole point of owning shares is to share in a company’s profits. In simple terms, you make money through dividends or buybacks. Without that, there’s really no reason to own the stock. Sure, prices go up and down, and you can try to profit from that, but if a company never plans to return money to shareholders, there’s nothing real behind the price. Eventually you’d just be holding on until the company fades away or goes bankrupt.
Buybacks are just another way of giving profits back to shareholders—an alternative to dividends with different tax implications. Their purpose isn't to "allow companies to reward executives directly", they are just an alternative way for shareholders to share in the profits.
A company could tie executives compensation to the amount of dividend if it wanted. That might be a good idea.
Share buybacks is not some weird loophole that allows executives to get paid.
Companies are always allowed to reward their executives and other employees by giving them money, stock options, or other rewards.
Unfortunately CEOs have to do buybacks at every opportunity, because otherwise shareholders will sue them for failing to maximize shareholder value.
> Jobs was always thinking Apple could do better with the money in R&D than paying off shareholders. Wall Street did not approve of this position, but Jobs wasn’t one to listen to anybody, so it did not matter.
(Head spins) wait what?! No! You’re not supposed to do that! If you fail to always maximize short term profits, people might start thinking CEOs actually have agency, and they won’t be able to hide behind the “maximizing shareholder value” excuse!
> shareholders will sue them for failing to maximize shareholder value
That's quite a bold claim. Do you have an example in which a company/CEO/board was sued specifically for not doing enough buybacks?
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The article doesn't mention that Bayh-Dole made it legal for a university to exclusively license a patent generated by a government-financed researcher to a corporation.
Prior to this, if a corporation wanted to have exclusive rights to basic patents, they'd have to run their own private research labs to generate those patents. Prior to Bayh-Dole, university inventions were patented but there were no exclusive licensing deals. This means no competitive advantage; anyone can use license the patents (I believe any US citizen) before Bayh-Dole.
So corporations largely stopped funding private research labs like Bell and instead entered into public-private partnerships; on the academic side we saw the rise of the shady enterpreneurial researcher whose business plan was to use government funds to generate patents (not uncommonly based on fraudulent research) which formed the basis of a start-up which was sold to a major corporation.
The fix is simple: patents generated with taxpayer dollars at American universities should be available to any American citizen for a small licensing fee; if people want exclusive rights to patents, they need to put up the capital for the research institution themselves, as was the case with Bell Labs. Practically, this starts with a repeal of Bayh-Dole.
This sounds like a much more reasonable explanation for the fall of the corporate labs.
The obvious retort would be, if the situation were so favorable for corporations before Bayh-Dole, why were so few licensing deals in place before the passage of Bayh-Dole (fewer than 5% of technologies were licensed)?
> So corporations largely stopped funding private research labs like Bell and instead entered into public-private partnerships
They didn't though. Bayh-Dole was 1980. All the big tech firms have invested massively in R&D since then, and I think it's also true for many non-tech industries or tech-adjacent (e.g. chip manufacturing, oil and gas).
Most tech companies appear to put basically all their engineering/ product orgs down as R&D. That's probably not how most people understand the term.
Repealing Bayh-Dole is a terrible idea. A lot of research produces enough to get a patent but still requires a lot more development to get a product. Drugs are probably the best example.
Wouldn't a company still be able to patent the additional development they did to turn the original research into a product? E.g. delivery method patents are very common.
I don't see why they need to own the original research.
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What's missing from this explanation is that the corporate tax rate was also much higher, but R&D dramatically cut down profit that would be taxed and was taxed lower. So large corporations like Bell Labs and co would basically say "do we give the government X in taxes, or do we spend X on research?". They chose research, so we got the technology that powers our world.
That, combined with stock buybacks and the general take over of Friedman-economics resulted in a far more focused short term thinking and outsourcing research as much as possible due to uncertain horizon risks.
Exactly.
These days you're better off giving it to a university with strings attached. Sure, they might piss a bunch of it away, but when you account for the dollars on the subject you care about after taxes are leeched out it's still more efficient than building out research within the confines of a for-profit entity that gets taxed at such.
This is why we no longer have corporate research labs and damn near every university is bristling with BigCo funded stuff.
Nothing against research universities as good stuff does occur there, but it just seems like it was such a a huge loss seeing those corporate labs disappear. I think it helps to have scientists and engineers closer to the problem and who don't have to spend a huge amount of their time writing grants and training grad students.
Having worked in corporate labs they really were great and it's a shame they're disappearing.
It's not only share buybacks, I would include offshoring, DEI, and a consolidation of management power as major factors in the destruction these labs. The pipeline has been so bad for so long now that it would take a miracle to get things started again.
The last org I worked at offshored the most promising work to China. Due to some high up international agreement the company had to spend $X on offshored workers so not only were they considered cheap they were considered free because the money had to be spent anyway and was coming out of someone else's budget.
I was working at a Research Org when the DEI push came through and it was a absolute disaster. A lot of projects ended their internship programs and avoided hiring in order to minimize the exposure. The bargain was always, you can have 6 seats but 50% need to be women and 50% need to be minorities, and since everyone got the push at the same time it meant that due to the intense competition for the same people you'd end up really having to scrape the bottom of the barrel. That made a lot of initiatives unviable.
I wasn't working at Yahoo Research but as I heard it was canned following a management rift. They were already bleeding talent for a while but had retained some good people that stayed out of comfort and inertia. The smart people cultivated in research orgs tend to be a competing source of power and management hates that.
I'm not really seeing how the blacks and women ruined corporate research, can you expand on that more? Are you saying they were all retarded and without enough white, Asian, and Indian men nothing could be accomplished?
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And you can have a career track that normal people will actually want. The whole phd -> postdoc -> (maybe) tenured professor thing is such misery that I never even gave it a thought as a career.
Yeah if you go check almost any major scientific breakthrough of the past century it usually starts with "some guy was working in a corporate lab with an unlimited budget". We're stagnating as a species a lot more, but at least the shareholders got a payout for their hard work of doing literally nothing. Rent seeking at its worst.
Silly argument. Everything in gravitational physics goes back to Newton? Who cares about Convex Optimization if you do not undertand gravity? Math goes back to Euclid and the Greeks?
Mankind has consistently built upon existing knowledge. "If I have seen further, it is by standing on the shoulders of giants. (Newton)"
IMHO, what we are seeing is the US was generating 50% of the world's GDP at the end of World War II. In that era it could afford to many non-economical things - Marshall Plan, funding research at universities, etc. The US is no longer the dominant economic engine. It actually has to prioritize its spending. Money spent on research is money not spent on food stamps, housing the homeless, defense.
What is never mentioned in these discussions is how much money has been spent on research that did nothing. Advanced nothing. When that is factored in, what is the ROI of university-based research?
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Yes, let's not pay out the investors. That's how you get lots of funding.
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lol hwut?
Except for DNA, CRISPR, WWW, mRNA, the manhattan project, ARPA, GPS, etc
Umm, no. Maybe they have better PR departments than universities but this is clearly nonsense.
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> it was such a a huge loss seeing those corporate labs disappear.
A loss for whom? Society? Of course, and that's exactly why they don't happen anymore -- because while they were a boon for society they were a terrible bet for the company. And when a company has a choice between doing good for their bottom line or doing good for society, 100% of the time they choose their bottom line.
I mean, look at the legacy of Xerox Parc from Xerox's perspective. They invited this guy in, Steve Jobs, and he commercialized their ideas. Today Xerox is worth pennies on the dollar compared to their height, doing none of what Xerox Parc researched. Apple ate their lunch. The ROI for Xerox Parc was terrible for Xerox.
For all the amazing stuff they did, they were not rewarded by the marketplace for it, they didn't produce better products for themselves, they just did other companies' R&D.
That's where universities come in, and where they are vital. If you take them out, their role will not be filled by corporations, because corpos can't stomach the kind of dollars needed to do fundamental research. Only the government can stomach that, and if somehow the voters are convinced all this isn't worth funding, it just won't happen at any level.
This implies Xerox got no return on their research, and simply let Apple take their research, which isn't true. Rather, it was part of the investment deal they made with Apple [1]:
> Apple was already one of the hottest tech firms in the country. Everyone in the Valley wanted a piece of it. So Jobs proposed a deal: he would allow Xerox to buy a hundred thousand shares of his company for a million dollars—its highly anticipated I.P.O. was just a year away—if PARC would “open its kimono.”
Xerox clearly undervalued the research they were producing, but it wasn't like they just gave it away entirely. Per [2] the valuation of those shares in 2018 would be $1.2 billion had they not sold them - undervalued in hindsight, but not nothing.
Xerox's lack of capitalisation was a problem of their own making, not something inherent about investing in basic research.
[1]: https://www.newyorker.com/magazine/2011/05/16/creation-myth
[2]: https://researchnarrative.com/thinkerry/the-company-that-cou...
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All of your failure examples are failures of management and “leadership”.
The corps won't stomach it anymore at the scale they formerly did, but at one point they did. It could happen again some day...just a lot would have to change.
Parc just didn't capitalize on what they had. I know the Alto was expensive, but still seems like a huge shame.
Yeah, no, the ROI on Xerox Parc was excellent for Xerox, because of the technology they _did_ successfully commercialize on their own: the laser printer. It helped Xerox to $8 billion in revenue in 1984, a level Apple didn't beat until 2006. Even Microsoft didn't beat Xerox in revenue until the year 2000, where Xerox had $19 billion in revenue. Apple didn't reach that level until 2010. So you could say that it took the iPhone to beat laser printers; the Machintosh wasn't enough.
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It's not even clear that the premise is true. There's lots of 'research' done in the big tech companies.
The biggest reason why companies don't seek to emulate "Dupont, Bell Labs, IBM, AT&T, Xerox, Kodak, GE", is probably that it reads like a list of textbox examples of "companies that failed to execute on their research findings", so clearly there was something wrong with this approach.
That isn’t what they’re textbooks examples of.
GE (under Jack Welch specifically) is a textbook example of how financialization and focusing on numbers at the expense of products destroys companies.
Kodak is a textbook example of disruption. Yes they failed to capitalize on digital cameras specifically, but their research in all other areas was very much acted upon.
Xerox and Kodak, at least, stumbled into the future and then refused it.
The same thing will happen to Google & co.
And DuPont is very much alive doing DuPont things.
My mental model as an outsider, is the vibe out of Google is that they push the most talented folks out via process / politics. Not intentionally, just the reality of squeezing the creative type employee / work. Replacing creative smarts which is difficult or impossible to measure, with operational smarts, more easily measured. Those creative smart people mostly go on to start up other companies.
Its worked out ok for Google and others, because there's little teeth to anti monopoly, so all the big tech players can just buy the successes, which is safer than trying to grow them (esp. once the talent left). I really have no idea if this is an accurate take as its mostly vibes, sans for a few of said smart Google folks I've met in startup land(s). Yet Google is so big, they could bleed all kinds of employees telling all kinds of stories and it could all be simply random. Yet at the same time I can't help but think about every aging tech companies biggest / best products being via acquisition.
While I think monopoly is bad, I don't know if ^ otherwise is so bad. Maybe its just creative type folks _should_ avoid big tech, and build their own labs. Capital and compute are readily available to people who can demonstrate success, and its easier than ever to build and experiment in some fields. i.e. if we had stricter capital accumulation associated taxes, maybe the ills of this process wouldn't be so bad.
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...and there's 3M and Würth.
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It can appear that some famous companies pursue pure research as a source of public luster.
The bigger problem today is that there is simply nothing more left to research. Everything that is being worked on are at most optimizations, which allways have a dollar spent vs dollar returned amount on them.
“While it is never safe to affirm that the future of Physical Science has no marvels in store even more astonishing than those of the past, it seems probable that most of the grand underlying principles have been firmly established and that further advances are to be sought chiefly in the rigorous application of these principles to all the phenomena which come under our notice.” Albert A. Michelson (yes, that Michelson, one half of Michelson-Morley), 1894
If it feels like there’s nothing for us engineers to research, that’s probably a sign we need more basic research from the scientists!
that patently ridiculous, we're just getting started
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you will look back on this and feel so silly.
Corporate R&D dies under the short-term thinking of quarterly profits. The best pure R&D seems to be coming from private companies that are able to sustain losses for long periods of time until a significant breakthrough is achieved (e.g. SpaceX, OpenAI, etc.).
Share buyback is the same as giving dividends - except the share holder doesn’t have to pay taxes until they sell. To the company, they spend the same amount on share buyback vs giving dividends. I don’t see how this argument holds up.
Further more, while some might argue that corporate R&D is better due to being closer to the problem but it is private research and not shared with the world like university research is.
It's not exactly the same: if the company does buybacks and then loses value or goes bankrupt, shareholders never get the benefit of those buybacks.
If they really wanted that dividend, they could see that the company is doing $X in buybacks, figure out what percent of its market cap that works out to, sell a corresponding amount, and pretend it's a dividend.
A lot of shareholders also DRIP, but they should prefer buybacks for tax reasons.
depends how sophisticated the investor in the story is. it thay are perfect homo economicus they would have been selling some of those inflated shares to do what they would have done with the dividends
Shareholder prefer buybacks for tax reasons.
He didn't say it was exactly same, only that in principle it's the same - company returning money to shareholders.
Such an action has no effect on company valuation.
I read "stock buybacks in 1982" as shorthand for "financialization and short-term thinking at the expense of long-term gains", which certainly happened across corporate America and Britain starting with Reagan and Thatcher.
You state that as if it is a fact, but from what I see the tech industry has engaged in the longest term corporate strategies I have ever seen. Amazon took losses for the better part of two decades before it showed a profit, and public markets would never even fund a venture like SpaceX.
Amazon is a dystopian nightmare of a company. Amazon took losses in order to decimate their competition. Their business model you hype is evil af. They have to have people planning for when they run out of local workers their warehouses are so bad. They allow in fake fuses and tons of other fake products because they are cool with the risk to peoples lives. Instead of giving you decent search results they sell ad spots.
So yes, Amazon represents 'good management thinking' post 2010. But not corporate thinking pre 1980s that, you know, build the US/UK to the positions they were able to cost on up until now.
Good point. And both Google and Apple used to reinvest all benefits in R&D.
My impression is that as they calcify into money-printing machines, this stopped. An example being Google's famed 20% that are apparently a long dead memory.
In tech it was the switch from creative corporatism, which is focused on opportunities, invention, and infrastructure, to extractive corporatism and oligarchy, which are focused on scams, exploitation, and the creation of rigid hierarchies of privilege.
We're now in the end stage of the latter in the US.
The US still plays at invention - or rather a few of its oligarchs do - but it's far, far behind what's happening in other countries.
Honestly this sounds like a narrative in your head a lot more than something that is happening in actual reality.
The US doesn't have oligarchs except maybe Alex Karp.
Oligarch is a specific thing with a specific meaning.
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New Deal-era regulations on financial flows made it painful tax-wise to remove cash from a company. So you either had to pay it as dividends, or you invest it in R&D, wages, or benefits for employees (this is why companies used to have very plush benefits even for lower level managers). When combined with pretty aggressive anti-trust, it also funneled cash into business expansion via conglomerates.
Companies were asset rich (which is the seam of valuable companies that private equity has been strip mining for 40 years, but even those are running out now).
Share buybacks are more symbolic that the Reagan era made it easy to take cash out of companies, which led to a race to the bottom of extracting as much cash as possible while leaving little for operations, wages, or expansion.
Previously a company could:
1. Re-invest profits in R&D. Benefit to shareholder: potentially grow the value of their shares dramatically.
2. Make a dividend. Benefit to shareholder: cash that they can re-invest or use, LESS capital gains tax.
Ending stock buybacks creates another option:
3. Buyback stock. Benefit to shareholder: increased share value, and they can control when it is realized.
If there are boards that believe (3) > (1) > (2), then allowing stock buybacks will result in those companies shifting R&D investment into buybacks.
A few points that seem to be going unstated here:
a) allowing share buy-backs might be good or bad. But it isn't good or bad unconditionally! The restrictions on the buyback policy should matter. Ideally, buybacks should make prices boring not create ultra thin books with hefty valuations that are cheaper to manipulate. But it seems the regulations around buybacks are in line with incentivizing growth and not stabilizing real prices.
b) to some extent putting uncertain/opaque research inside corporations is a defense against getting into regimes where it becomes easier to manipulate prices. I hadn't thought of it before, but if if important public companies become beholden to traded price and it becomes easy enough for large foreign entities to move markets, then it is simply a matter of "pricing" short term market punishment of a company for any policy you don't like. Yes, this might seem a bit far fetched, but remember that this kind of incremental worsening of outcomes is precisely what people say is hapenning via regulation and legal challenge in key industries.
Just some interesting thought legs spun off from the discussions here.
share buybacks are sort of a voting mechanism - it shows the company has no other uses for the money than to reward shareholders - hence pumping stock price up.
if the company has a vision - then reinvesting that money into research or what else is better. it might reap the benefits, it might not.
companies use buybacks if they can't do anything productive with the money - Apple is a recent example.
And before buybacks they used distributions, which have always been allowed, so there has been no change there.
The buybacks also compensate for dilution from paying employees in shares.
> I'm not seeing how you get from share buybacks to a shift in priorities in corporate research.
pretty easily: stock buybacks allow you to directly reward executives and funnel profits back to shareholders (by increasing share prices), making the company appear more valuable (further driving investment)
research brings long-term benefits, and immediate outcomes don't show up in 10-Qs
Of course the relation is minimal if it exists at all.
Stock buybacks are simply a more tax efficient dividend.
Of course, I forgot how management's compensation used to be 'dividend options'.
At least for AT&T, Kodak, and IBM, what was funding their research divisions was monopoly profits. When those dried up, the research dried up as well. The modern equivalent to AT&T is Google.
Yeah, it's nonsense.
I think the core problem is that innovators typically only capture low single digit percent of the value they generate for society.
Bell Labs existed in an anomalous environment where their monopoly allowed them to capture more of the value of R&D, so they invested more into it.
This is the typical argument for public subsidy of R&D across both public and private settings because this low capture rate means that it is underprovisioned for society's benefit.
Something I haven't seen mentioned in this thread or TFA is just how high corporate taxes were (and even personal investment taxes) in the 50s and 60s, and this influenced spending on R&D immensely because that investment wasn't considered taxable income. Tax rates were over 50% for much of the era of Bell Labs and Xerox PARC.
> I'm not seeing how you get from share buybacks to a shift in priorities in corporate research
seems to me investing in your own company:
before: use funds actively for research and development
after: use funds passively to "invest" in your company by buying stock
seems like that old parable where someone buries their investment.
EDIT: parable of the talents
https://en.wikipedia.org/wiki/Parable_of_the_Talents
I would agree the anti-monopoly action had far more to do with that.
Basically, if you you think you can leverage your R&D into maintaining your monopoly and extending it to other areas it makes sense if for nothing else to keep the smart people who might otherwise disrupt your monopoly connected to you.
But if you are going to get broken up, just take as much short term profits as soon as you can
Ma Bell actually was regulated and mandated to put profits into research. It wasn’t a choice though they could go above the minimums I presume.
It is a totally delusional argument. Companies always could reward their shareholders, stock buybacks aren't fundamentally different from paying dividends to shareholders. The idea that stock buybacks are what caused a decrease in company funded basic science is ridiculous.
Only in very rare cases is doing basic science anything but a total waste of money, viewed from a commercial perspective. Companies should seek to be commercial entities, which operate for profit. Anything else is just self destruction.
Look at Bell Labs, it could only exist because some company decided it could use a money shredder. Bell Labs could not survive the dismantling of the Bell telephone monopoly, because ending that monopoly ended the prerequisite that was needed to allow it to exist.
Yes yes, companies used to compensate management with 'dividend options' so switching to stock options totally didn't pervert management's incentives.
And management doesn't manipulate the stock using stock buybacks. Why would they? Their performance and compensation are only completely tied to stock price. But no, stock buybacks don't allow perverse incentives that lead to short term thinking different than dividends. Totally the same.
If you write something which is more than pure sarcasm it might become readable and form into a coherent argument.
Do you genuinely believe that the breakup of the Bell monopoly had a smaller effect on Bell Labs than stock buybacks?
Stock buybacks also are not stock manipulation and managers aren't rewarded because they buy back stocks. The board understand what a stock buyback is, they reward managers for being able to buy back stocks, in other words, they reward them for profits, which are then paid in buybacks or dividends. Stock buy backs are a tool corporations use to reward shareholders, they have no fundamental difference to dividends.
Dividends have the exact same short term incentives. Do you think that a manager can not be rewarded for his paying out dividends, which leads him to cut R&D spending to increase short term profits? It is just delusional to think that there is a difference and certainly in the scientific literature about corporate finance it would be a fringe belief to separate those two as you do.
To be honest it is a bit upsetting to read a comment with so little understanding of the subject and so little imagination. Do you truly believe that managers can not have short term dividend goals? How uninformed are you.
> I'm not seeing how you get from share buybacks to a shift in priorities in corporate research.
Share buybacks are just the new go-to thing to blame. Economics students (at least "development economics") are memorising this concept all over the globe, so you can expect it more and more.
New? It's been blamed for a long time now.
And it makes sense on this front.
You make tax optimising by dumping profits on R&D less attractive (and around the same time change patenting law with bayh-dole) and make it more attractive to spend it on stock buybacks to directly benefit shareholders
Results seen in the real world line up as less is spent on the former and more on the later so i'm not sure how the blame is unfounded
Ah yes. The share buyback boogie man. If only companies couldn’t buy back shares then all that extra money would flow into research, except not. Shareholders would be demanding dividends.
Why not?
Suddenly they had a more lucrative was to spend their money, so they did.
Because before buybacks there were dividends. Did the difference between buybacks and dividends really make the difference between doing basic research and not?
It’s likely, dividends provide higher levels of exponential growth long term for an otherwise steady state company. It makes them more compelling than many long term investments.
Convert X% of a stocks value into a dividend and you pay taxes on that before you can buy more stock, but someone who keeps buying stock sees an exponential return. (Higher percentage of the company = larger dividends)
A company buys back X% of its stock functions like a dividend w/ stock purchase, but without that tax on dividends you’re effectively buying more stock. Adding a tax on stock buybacks could eliminate such bias, but it’s unlikely to happen any time soon.
On one hand, sure. They're able to make an informed decision to maximize return to shareholders.
On the other hand, a ton of amazing inventions came out of that system which created entire industries that went on to turbocharge the economy and create millions of jobs. I can see how someone may feel that a company being able to inflate it's stock price more is less useful to humanity and not worth the trade.
There may have been other reasons as well for the collapse of corporate research like changing tax rates, or maybe we were just in a golden age (1940s-1980s) as new advancements in physics and materials science allowed for a rapid amount of discoveries and now we're back in a slower period.
Science takes years to decades to see a return. Much too long for the quarterly returns folks.
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This is disingenuous.
The driver behind the buybacks was also the motive to shift from research and manufacturing and into profits.
The massive failure is in inaccurately quantifying the true value of these labs.
You're not missing anything, it's just completely wrong.
Note the "maximize shareholder value" aspect. That's the essential driving force behind business since then: The Friedman doctrine.
Now consider the choices a company makes when executives hold the Friedman doctrine as orthodoxy. Put money into basic research that might generate shareholder value in some unknown time, or buy their own stock back and pump up the price?
Buying back stock is just as a way to distribute money to shareholders. It's neutral when it comes to "shareholder value". It's the same as paying dividends and having some shareholders reinvest it.
It just saves an extra step and doesn't trigger tax event. It also makes more sense. If you prefer cash you sell it on the market to the company. If you prefer holding shares you don't do anything. You get a choice when it cash out instead of being forced to on regular basis.
Where do you think the capital being returned is going? If it's not being consumed but instead is mostly getting reinvested somewhere else than what is the problem? Capital markets are working as intended to move capital out of a firm that cannot generate high returns with it into ones that can.
Why would companies not want to maximize their value before share buybacks?
Your question is a reflection of just how engrained the Friedman doctrine has become in business. Milton Friedman introduced his theory in 1970, but it really got a boost in the 80s. First in 1981 when President Reagan named him to his Economic Policy Advisory Board and again in 1988, when Reagan gave him the Presidential Medal of Freedom and the National Medal of Science.
There are still many competing theories of business ethics, but the Friedman doctrine is what drives corporations today.
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Loads of reasons. The shareholder theory of corporate governance is actually not very old.
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